Business Loan vs Line of Credit: How to Choose the Right One

A business loan gives you a lump sum you repay over a fixed term. A business line of credit gives you a revolving facility you draw from as needed, paying interest only on what you use. The right choice depends on whether you need the full amount on day one or at different times throughout the year. Here's how to decide, including the dollar cost of choosing the wrong one.

Why the product choice matters more than the rate

Most business owners compare interest rates. That's the wrong starting point. A $100,000 business loan at 9% can cost more in total interest than a $100,000 line of credit at 14%, because with a line of credit you only pay interest on what you've actually drawn down.

With the RBA cash rate at 4.10% in early 2026 and business lending rates adjusting accordingly, the gap between loan rates and line of credit rates has widened. That makes the product decision even more important than the rate comparison. Getting the right product at a slightly higher rate beats the wrong product at a lower rate.

The same $100,000, two different costs

This is the calculation that changes how you think about this decision.

Scenario: You need access to $100,000 for working capital over 12 months.

Your actual usage pattern is uneven. You draw the full $100,000 in month one for a bulk purchase, pay it down to $30,000 by month three, draw $60,000 in month six for a second purchase, and finish the year at $20,000. Your average drawn balance across the year is about $40,000.

Despite the line of credit having a rate that's 5 percentage points higher, it costs $3,400 less over the year because you're only paying interest on what you've used, not on $100,000 sitting in your account.

The reverse is also true. If you need the full $100,000 from day one and use it all for the full term, the business loan at 9% costs $9,000 and the line of credit at 14% costs $14,000. Same amount, different usage pattern, completely different result.

How each product works

Business loan

A business loan provides a one-off lump sum deposited into your account. You repay it in fixed instalments (weekly, fortnightly, or monthly) over a set term. The interest rate is usually fixed, and you pay interest on the full loan amount from the day it settles.

At Emu Money, business loans range from $2,000 to $2 million+, with rates from 7.99% and terms from 3 to 60 months.

How the interest works: On a $100,000 loan at 9% over 3 years, your monthly repayment is approximately $3,180. Total interest paid over the full term: roughly $14,500. The repayment amount is the same every month regardless of whether you've used the funds.

Business line of credit

A line of credit provides an approved credit limit you can draw from, repay, and draw from again. Interest is calculated daily on the outstanding drawn balance only. The rate is typically variable.

At Emu Money, lines of credit range from $5,000 to $1 million, with a revolving facility that allows you to redraw funds as you repay.

How the interest works: Interest accrues on your daily drawn balance using your annual rate divided by 365 (or 360 with some lenders, which slightly increases the effective rate). If you have a $200,000 facility but only $50,000 drawn, you pay interest on $50,000. If you repay to $0, you pay no interest at all until you draw again.

The wrong product costs real money

Choosing the wrong product for your situation is more expensive than most business owners realise. Three common mismatches:

The seasonal retailer paying interest all year

A retailer takes a $150,000 business loan to fund seasonal inventory. They need the full amount for four months (September to December) but only use $30,000 of it for the remaining eight months. They're paying 9% interest on $150,000 for 12 months: about $13,500.

With a line of credit at 14%, they'd pay interest on $150,000 for four months (~$7,000) and $30,000 for eight months (~$2,800). Total: roughly $9,800. The "more expensive" product saves them $3,700 per year.

The tradie using a line of credit for an asset

A tradesperson uses their $80,000 line of credit at 14% to buy a work vehicle. They draw the full amount and won't repay it quickly because the vehicle is a long-term asset. After 12 months they've paid roughly $11,200 in interest.

A fixed-rate business loan at 9% would cost about $7,200 in interest over the same period. Even better, equipment finance on the vehicle specifically might come in at 7-8% because the vehicle itself secures the loan. Wrong product, $4,000+ penalty.

The consultancy borrowing a lump sum for payroll gaps

A professional services firm takes a $200,000 business loan to cover payroll gaps between client payments. In reality, they only need $40,000 to $80,000 at any given time, drawn for 2-3 weeks until invoices are paid. They're paying 9% on $200,000 year-round: $18,000.

A line of credit at 14% with an average drawn balance of $50,000 costs roughly $7,000. The firm is paying $11,000 more per year because they chose the wrong product.

Decision tree: which product do you need?

Work through these questions in order:

Do you need the full amount deposited into your account on day one? If yes: business loan. You're paying interest on the full amount either way, so take the lower fixed rate.

Is the purpose a specific one-off purchase (equipment, vehicle, fit-out)? If yes: business loan or equipment finance. Fixed-rate, fixed-term, matched to the asset's useful life. A business loan for general purchases, equipment finance if the asset can serve as security.

Will you need different amounts at different times throughout the year? If yes: line of credit. You pay interest only on what you draw, and you can draw and repay repeatedly without reapplying.

Is this for ongoing working capital or cash flow management? If yes: line of credit. The revolving facility matches the revolving nature of working capital. Draw when invoices are slow, repay when they land.

Is this to cover a defined project with a clear end date? If yes: business loan. The fixed term matches the project timeline, and the fixed rate makes budgeting straightforward.

When you need both

Smart businesses often use a business loan and a line of credit together. The loan handles the big, defined expense. The line of credit handles the ongoing cash flow variability.

A cafe owner opening a second location might take a $120,000 business loan for the fit-out (one-off expense, fixed timeline) and a $50,000 line of credit for working capital during the first 6 months of trading (variable needs, uncertain timing).

The loan gives them a fixed repayment they can budget around. The line of credit gives them a safety net they only pay for when they use it. Total cost is lower than trying to fund both needs from a single product.

Side-by-side comparison

If you're weighing up broader options beyond these two products, our guides on debt vs equity financing and small business grants cover alternative paths. And if approval is a concern, how to get approved for a business loan breaks down what lenders look for.

This article is general information only and is not financial advice.